8.  Problem 11.09 (Capital Budgeting Criteria: EthicalConsiderations)

An electric utility is considering a new power plant innorthern Arizona. Power from the plant would be sold in the Phoenixarea, where it is badly needed. Because the firm has received apermit, the plant would be legal; but it would cause some airpollution. The company could spend an additional $40 million atYear 0 to mitigate the environmental problem, but it would not berequired to do so. The plant without mitigation would cost $210.55million, and the expected cash inflows would be $70 million peryear for 5 years. If the firm does invest in mitigation, the annualinflows would be $75.99 million. Unemployment in the area where theplant would be built is high, and the plant would provide about 350good jobs. The risk adjusted WACC is 16%. Calculate the NPV and IRR with mitigation. Enter your answer forNPV in millions. For example, an answer of $10,550,000 should beentered as 10.55. Negative values, if any, should be indicated by aminus sign. Do not round intermediate calculations. Round youranswers to two decimal places. NPV: $   million IRR:   % Calculate the NPV and IRR without mitigation. Enter your answerfor NPV in millions. For example, an answer of $10,550,000 shouldbe entered as 10.55. Negative values, if any, should be indicatedby a minus sign. Do not round intermediate calculations. Round youranswers to two decimal places. NPV: $   million IRR:   % How should the environmental effects be dealt with whenevaluating this project? The environmental effects if not mitigated would result inadditional cash flows. Therefore, since the plant is legal withoutmitigation, there are no benefits to performing a "no mitigation"analysis. The environmental effects should be ignored since the plant islegal without mitigation. The environmental effects should be treated as a sunk cost andtherefore ignored. If the utility mitigates for the environmental effects, theproject is not acceptable. However, before the company chooses todo the project without mitigation, it needs to make sure that anycosts of "ill will" for not mitigating for the environmentaleffects have been considered in the original analysis. The environmental effects should be treated as a remotepossibility and should only be considered at the time in which theyactually occur. -Select-IIIIIIIVVItem 5 Should this project be undertaken? Even when no mitigation is considered the project has anegative NPV, so it should not be undertaken. The project should be undertaken only if they do not mitigatefor the environmental effects. However, they want to make sure thatthey've done the analysis properly due to any "ill will" andadditional "costs" that might result from undertaking the projectwithout concern for the environmental impacts. The project should be undertaken only under the "mitigation"assumption. The project should be undertaken since the IRR is positiveunder both the "mitigation" and "no mitigation" assumptions. The project should be undertaken since the NPV is positiveunder both the "mitigation" and "no mitigation" assumptions. -Select-IIIIIIIVVItem 6